EMISSIONS TRADING: LATEST NEWS FROM OUTSIDE JAPAN

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1 RIETI BROWN BAG LUNCH May EMISSIONS TRADING: LATEST NEWS FROM OUTSIDE JAPAN SIMILARITIES, DIFFERENCES, AND THE POSSIBILITIES OF LINKAGES Henry Derwent and David Lunsford, IETA

2 Who are IETA? Only cross sectoral, private sector international organisation promoting emissions trading to secure environmental goals Founded in 1999 Membership: ~170 companies 50% emitters 50% project developers, intermediaries, financial institutions, brokers, verifiers, legal firms 60% EU, 30% US/Canada, 10% Asia Swiss non profit Offices: Geneva, Brussels, Washington, Ottawa Role in Australia, Japan

3 Message for Japan Europe remains committed to cap and trade and in principle to international offsets and linking, but not yet to deeper targets Other large OECD countries are slowing down in the face of fierce political opposition The objections are in fact to doing anything significant on climate change, not to cap and trade as an instrument. They may not continue. Cap and trade remains a key weapon in the policy mix to achieve emissions reduction, but a uniform global scheme is a long way off Some larger developing countries are considering experimenting with forms of sectoral trading

4 Copenhagen: a sad outcome for the carbon market certainty about timescales and likely price ranges (particularly for the EU-ETS) X reform and improved management for the CDM new scaled-up beyond-cdm private finance mechanisms? X plans for engagement with private finance consistent with the need for it X But maybe less bad over time for climate change

5 Stormy Weather : The Current Trading World National or broader schemes in operation State schemes in operation, or close National scheme before legislature National scheme in preparation National scheme under consideration Major offset suppliers White Certificate schemes

6 Recent US Climate Bills

7 Latest Situation with KGL Senate prospects for climate and energy legislation are weak without Sen. Graham and non-existent without coal-state Democrats. Based on various sources, below find a summary of potential design elements contained in the yet tobe released US Senate bipartisan climate & energy bill. Economy Wide Reduction Targets: 17% reduction by 2020 from 2005 levels; 80% reduction by C&T Rebranded: Legislation to re brand cap and trade in favour of pollution reduction scheme/targets. EPA Pre Emption: US agency would be barred from regulating GHG emissions. Regional Pre Emption: State and regional GHG cap and trade schemes would be terminated, but states could still impose EE and RES measures. Phased in Coverage: Electric power utilities would be covered, starting in 2013, with allowances being traded on a regulated market. Allowance allocation is unknown, but likely a combination of gratis and auctioning expected. Industrials (threshold of 25ktCO 2 e annually) to be incorporated in the program starting in Offsets: Combination of international and domestic offsets allowed to help companies cost effectively meet goals. Offset volumes, project eligibility and other details are unknown. Transport Emissions & Refineries: No gas tax. Oil refiners likely required to purchase allowances to cover product emissions. Diesel revenues potentially channelled into US Highway Trust Fund. Price Collar: Price floor tied to inflation, enacted through reserve mechanism. Floor: US$10; Ceiling: US$30. Consumer Rebates: To cover impact of higher energy costs on consumers (potentially 2/3 of revenue) Border Adjustment Measures: Border protections for energy intensive industries (e.g. steel, chemical, paper).

8 US Carbon Market Oversight Genesis of Concerns The Legacy of Enron The Wall Street Meltdown Skepticism about Global Carbon Markets. Proposals in Congress The U.S. House of Representatives The U.S. Senate Survey of Key Issues and Proposals Most of the proposals for carbon market oversight seek to address a few primary issues: Who should be allowed to participate in carbon markets? What market restrictions could best guard against fraud, market manipulation and excessive speculation? What information is needed for effective regulation on the market, and how should the information be collected? Which agency should oversee the market? Can the carbon market properly utilize over the counter trading, or should elements of the market be limited to exchanges or central clearing on an approved clearinghouse?

9 US Financial Reform US financial reform legislation is under debate on the Senate Floor now, and is likely to pass. Without climate legislation that imposes carbon-specific market oversight rules, this financial legislation will govern emissions markets The bill includes derivative market reform provisions that would impact emissions trading Most swaps will be subject to mandatory clearing and/or exchange-trading A carve out for OTC transactions is likely, but the breadth of the "end-user" clearing exemption is in play The legislation will continue to evolve during the next week, as amendments are proposed We should have a better sense of market implications for carbon by end of May, when House and Senate bills are reconciled

10 North America Regional Initiatives Western Climate Initiative (WCI) Signed: Feb 2007 Scheduled launch: 2012 Regional Greenhouse Gas Initiative (RGGI) Signed: 2005 Launch: Jan 2009 Midwest Greenhouse Gas Reduction Accord (MGA) Signed: Nov 2007 Scheduled launch: 2012

11 WCI Implementation Timeline The WCI is a collaboration of independent jurisdictions who commit to work together to identify, evaluate, and implement policies to tackle climate change at a regional level. WCI website

12 WCI Progress by Member Party Note: On 23 April, Utah pulled out of a 2012 start to its cap and trade program. The state will remain a WCI member.

13 California -Emissions Reduction Target: 1990 levels by Promulgated Draft Regulation passed November Precursor to 2nd Draft Regulation set to be released for public comment in spring PDR under the auspices of California Air Resources Board (CARB) -Primary design issue unresolved -Offset provisions stringent (4% of compliance obligation) -Unsure about of out-of-state, out-of-country acceptability of offsets -Anticipate undue reliance on auctions versus free allocations (appropriation mechanism? -CARB in the process of officially certifying offsets for compliance -Substantial legal challenges being mounted regarding forestry protocols -November 2010 election will have a ballot to indefinitely suspend AB32, until unemployment fallen substantially for a sustained period

14 Canada Federal and State Policy Update Ottawa in Limbo: Ottawa still intends to regulate greenhouse gas emissions in lock-step with Washington DC, and therefore continues to wait until the US introduces its federal climate plan before acting in Canada. Push for Cross-Country Coal Phase-Out: During the week of April 19, Minister Prentice unveiled the Conservatives plan to mandate the gradual retirement of coal-fired power plants across Canada and encourage investments in low/non-emitting power sources British Columbia: Cap and Trade Act: BC is committed to developing a cap and trade system under the WCI. The provincial government has enacted enabling legislation for a cap and trade program Alberta: plan includes a list of measures, but none have specific emission reduction targets or estimates Quebec and Ontario: developing a cap and trade system as part of the WCI and has signed an MOU together Manitoba: At Copenhagen, Manitoba committed to moving forward with legislation enabling the creation of a GHG cap and trade system.

15 CPRS Design and Australian Politics Where they had gotten to

16 NZ ETS Key features of the NZETS Broad sector coverage, with each sector phased in over time Upstream point of obligation Allocation targeted to mid-stream No free allocation for those who can pass on costs Linked to international markets - no quantitative restrictions on imports Key changes made in November 2009 Change to entry dates for a number of sectors: Stationary energy and industrial processes enter on 1 July 2010 Liquid fossil fuels enter on 1 July 2010 Agriculture enters on 1 January 2015 A transition phase will operate until December 2012: one emission unit for every two tonnes of emissions fixed price of $25 per emission unit Change to an intensity basis for allocation of emission units to emissions-intensive, trade-exposed industry Change to 1.3 per cent per year phase out rate for freely allocated emission units Previous phase-in timing:

17 EU-ETS current issues Over-supply Auctioning Benchmarking Market oversight and fraud Tougher targets Use of international offsets Leakage, border adjustments and competitiveness Need for other instruments the trading taliban

18 Auctioning Major exceptions to 100% auctioning ambition power sector, trade-exposed sectors Amount auctioned ( t in advance?), and when: degree of hedging needed Single or multiple platforms Types of instruments auctioned Maximum bidding limits; eligibility; tied bids; frequency Auctioning rules may be delayed till after summer

19 Market Oversight OTC and exchanges Registries and recycling Commodities or financial instruments Transparency and commercial confidentiality Special problems of carbon Comparison with US issues Fraud issues Three Britons charged over 3mcarbon-trading 'carousel fraud' Europe's Carbon Mafia

20 -30% and draft communiqué Economic analysis Non-EUETS sectors carbon tax Further restrictions on CDM No serious proposals to pull back EU looking for linking but prepared to go it alone Impact of renewables and energy efficiency obligations Imports and border tax adjustments very difficult in practice Risk of losing out in green jobs race

21 CDM state of the market Pipeline seems to continue EU abandonment Dependence on the US Competition from AAUs Balancing portfolios Fragmentation of international offsets

22 CDM reform Good news from Copenhagen: Explanation, communication, host country prerogative, appeals, LDCs, staffing VVM materiality and level of assurance Less good news: standardised baselines CCS, McKinsey Report

23 New Instruments Sectoral Crediting Model 1 Reports emissions and receives International credits for distribution or sale Sectoral Coordinating Entity Impositions And policies Sectoral Coordinating Entity International Credit Issuing Agency SCP baseline Creditable Emissions Reduction Objective Firm A B C A B C Period 1 Period 2 Other approaches: Sectoral trading NAMA crediting IFIs and development funding Public sector guarantees Tapping the bond markets Hybrid instruments

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25 Message for Japan Europe remains committed to cap and trade and in principle to international offsets and linking, but not yet to deeper targets Other large OECD countries are slowing down in the face of fierce political opposition The objections are in fact to doing anything significant on climate change, not to cap and trade as an instrument. They may not continue. Cap and trade remains a key weapon in the policy mix to achieve emissions reduction, but a uniform global scheme is a long way off Some larger developing countries are considering experimenting with forms of sectoral trading

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28 Four Steps Forward, Two Steps Backward And one either way No global emissions reduction targets, Pledges without assessed comparability or «binding»force A serious, possibly mortal, blow for the UN process?? Engagement of Heads of State Money on the table A1 and key NA1 in the same document Monitored action by key NA1Parties

29 On the Road to Cancun better organisation? Ministerial preparations Petersberg and beyond Heads of State again? belief in an outcome MEF, G8, G20, AGF Don t worry, there s always Rio.